Property flipping occurs when someone buys a home for a low price, fixes it up, and sells it for a much higher price. While it sounds like a great way to make money, it’s frowned upon in the mortgage industry. In fact, the FHA does not allow the purchase of certain flipped homes.
We discuss the circumstances below.
What Does the FHA Consider Property Flipping?
The FHA’s rules are very clear. If a current owner owned the home for less than or equal to 90 days, the new buyer cannot use FHA financing. There are no exceptions. It doesn’t matter how close the sale price is to the one that the seller bought the home for – it’s just not eligible.
If the seller bought the property between 91 and 180 days, it may be eligible for FHA financing, but only under certain circumstances.
If the sales price is more than 100% higher than the acquisition price, the lender must acquire a 2nd and separate appraisal from the first appraisal. This appraisal must be conducted by a completely different appraiser that is not affiliated with the first. This way the lender can determine the ‘true’ value of the home, making sure it isn’t just inflated.
The FHA Exceptions
The above rules apply to all properties bought and sold within 180 days. But, there are a few exceptions. If the transaction involves an employer involved in relocating employees, the above situation does not apply. Other properties that do not have to follow the above rules include those sold by HUD or any other government agency; homes sold by nonprofit agencies; or homes acquired as an inheritance.
Who Does the FHA Flipping Rules Affect?
The people most affected by the FHA flipping rules are borrowers or buyers. They are the ones that need the funds and cannot get them. Of course, sellers feel the pain too, since their market is greatly reduced when they cannot entertain FHA buyers.
Buyers that find a home that was recently acquired will have to go through a lot more to get the property approved. Flat out, if the seller bought the home less than 90 days ago, it’s not an option, unless they meet one of the above exceptions.
If the home was bought within the 91 to 180 day window, buyers can bet that the lender will go through a rigorous process to make sure the home’s value is not inflated.
While it may seem unfair that the FHA does not allow property flipping, it’s really for everyone’s benefit. Unless there is a foolproof way for the bank to determine that the home’s value is not inflated, you could be taking a big risk. If you buy the home with only 3.5% down only to find out the value was inflated, you could be upside down on the home you just purchased. That’s not a good situation to be in at any time, but especially when you first purchase the home.
The FHA rules protect everyone, even though they are among the strictest in the industry. They prevent you from overpaying for a house and never getting a return on your investment. It may mean that you have to look harder for a home or wait longer to sell your home. However, the protection it provides can help you as a buyer or seller make the most of your investment.